Deeks VAT News Issue 36
September 2023 – Issue 36 Keeping you up to date on VAT changes In this month’s newsletter, we cover the following: Tour Operators’ Margin Scheme (TOMS) A Brief Guide Electronic Invoicing (eInvoicing) Land related services How to use HMRC advice and information Overages – what are they and what is the VAT treatment? B2B and […]
September 2023 – Issue 36
Keeping you up to date on VAT changes
In this month’s newsletter, we cover the following:
A VAT did you know?
When it comes to classifying whether something is a cake or a biscuit, did you know that their texture when stale is a key factor? Cakes tend to harden while biscuits soften. This small distinction can be the difference between a VAT rate of 20% and a zero rating for certain products. Jaffa Cakes, for instance, come to mind.
Similarly, for printed items like single sheet products or leaflets, their rigidity matters. A more flexible leaflet might enjoy a zero-rated treatment, while a stiffer one could be subject to the standard 20% VAT.
It’s always interesting to see how small details can influence tax categorisations. And there you have it. A bit surprising where the details can lead us, right? Let’s stay focused on the delightful world of VAT!
Tour Operators’ Margin Scheme (TOMS) A Brief Guide
VAT and TOMS: Complex and costly
The tour operators’ margin scheme (TOMS) is a special scheme for businesses that buy in and re-sell travel, accommodation and certain other services as principals or undisclosed agents (ie; that act in their own name). In many cases, it enables VAT to be accounted for on travel supplies without businesses having to register and account for VAT in every country in which the services and goods are enjoyed. It does, however, apply to travel/accommodation services enjoyed within the UK and wholly outside the UK.
Under the scheme:
- VAT cannot be reclaimed on margin scheme supplies bought in for resale. VAT on overheads outside the TOMS can be reclaimed in the normal way.
- A UK-based tour operator need only account for VAT on the margin, ie; the difference between the amount received from customers and the amount paid to suppliers.
- There are special rules for determining the place, liability, and time of margin scheme supplies.
- VAT invoices cannot be issued for margin scheme supplies.
- In-house supplies supplied on their own are not subject to the TOMS and are taxed under the normal VAT rules. But a mixture of in-house supplies and bought-in margin scheme supplies must all be accounted for within the TOMS.
- No UK VAT is due via TOMS on travel/accommodation/tours enjoyed outside the UK.
Who must use the TOMS?
TOMS does not only apply to ‘traditional’ tour operators. It applies to any business which is making the type of supplies set out below, even if this is not its main business activity. For example, it must be used by:
- Hoteliers who buy in coach passenger transport to collect their guests at the start and end of their stay
- Coach operators who buy in hotel accommodation in order to put together a package
- Companies that arrange conferences, including providing hotel accommodation for delegates
- Schools arranging school trips
- Clubs and associations
The CJEC has confirmed that to make the application of the TOMS depend upon whether a trader was formally classified as a travel agent or tour operator would create distortion of competition. Ancillary travel services which constitute a small proportion of the package price compared to accommodation’ would not lead to a hotelier falling within the provisions, but where, in return for a package price, a hotelier habitually offers his customers travel to the hotel from distant pick-up points in addition to accommodation, such services cannot be treated as purely ancillary.
Supplies covered by the TOMS
The TOMS must be used by a person acting as a principal or undisclosed agent for
- ‘margin scheme supplies’; and ‘
- margin scheme packages’ ie single transactions which include one or more margin scheme supplies, possibly with other types of supplies (eg in-house supplies).
‘Margin scheme supplies’ are those supplies which are:
- bought in for the purpose of the business, and
- supplied for the benefit of a ‘traveller’ without material alteration or further processing
by a tour operator in an EU country in which he has established his business or has a fixed establishment.
A ‘traveller’ is a person, including a business or local authority, who receives supplies of transport and/or accommodation, other than for the purpose of re-supply.
If meeting the above conditions, the following are always treated as margin scheme supplies.
- Passenger transport
- Hire of means of transport
- Use of special lounges at airports
- Trips or excursions
- Services of tour guides
Other supplies meeting the above conditions may be treated as margin scheme supplies, but only if provided as part of a package with one or more of the supplies listed above. These include
- Theatre tickets
- Sports facilities
This scheme is complex, and specialist advice should always be sought before advising clients.
There have been two important cases relating to TOMS recently, that can be found at the links below:
- The Sonder Europe Limited case:
- The Golf Holidays Worldwide Limited case:
Electronic Invoicing (eInvoicing)
The rules for sending, receiving and storing VAT invoices in an electronic format
What is an eInvoicing?
eInvoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents. The format may be a structured format such as XML or an unstructured format such as PDF.
The benefits of eInvoicing
eInvoicing offers significant advantages over paper invoices. The electronic transmission of documents in a secure environment usually provides for:
- structured data for auditing
- improved traceability of orders
- decreased reliance on paper reducing storage and handling costs
- rapid access and retrieval
- improved cash flow
- security and easier dispute handling
Currently, a business does not have to use eInvoicing, but if it does, in conjunction with paper invoices, (a so-called dual system) it can only do this for a short period, ie; if eInvoicing is being trialled.
It is not necessary to inform HMRC that a business is using eInvoicing.
eInvoices must contain the same information as paper invoices.
A business may eInvoice where the “authenticity of the origin”, “integrity of invoice data”, and “legibility” can be ensured, and the customer agrees to receive eInvoices
- authenticity of the origin means the assurance of the identity of the supplier or issuer of the invoice
- integrity of content means that the invoice content has not been altered
- legibility of an invoice means that the invoice can be easily read
A business is free to select a method of ensuring the above requirements. Examples of ensuring authenticity and integrity include:
- an advanced or qualified electronic signature
- Electronic Data Interchange (EDI)
- business controls which create a reliable audit trail between an invoice and a supply of goods or services
HMRC accepts a variety of eInvoice message formats, including:
- traditional EDI standards such as UN/EDIFACT, EANCOM and ODETTE
- XML-based standards
- comma-delimited ASCII, PDF
The eInvoices must be transmitted in a secure environment, using industry-accepted authenticity and security technologies, including, but not limited to: http-s, SSL, S-MIME and FTP.
Internal controls required
A business will need to demonstrate that it has control over:
- completeness and accuracy of the invoice data
- timeliness of processing
- prevention, or detection of, the possible corruption of data during transmission
- prevention of duplication of processing (by the person who receives the invoice)
- prevention of the automatic processing, by the person who receives the invoice, of certain types of invoice on which VAT may not be recoverable – for example, margin scheme invoices
- a recovery plan in case of a system failure or loss of data
- an audit trail between eInvoicing systems and the internal application systems which are used to process the eInvoices
The same rules apply to storage of eInvoices as to paper invoices. A business must normally keep copies of all invoices for six years.
HMRC may request access to:
- the operations of any computer systems which produce or receive VAT invoices, and to the data stored on them
- supporting documentation including; file structures, audit trail, controls, safe keeping, and information about how the accounting system is organised
- information about the system’s interrogation facilities
HMRC must be able to take copies of information from the system.
If a business cannot meet the conditions for transmission and storage of eInvoicing, it will have to issue paper invoices.
We will provide a glossary to eInvoicing in the next Round-Up.
Land related services
Whether a service is “related to land” is important because there are distinct rules for this type of supply compared to the General Rule. The place of supply (POS) of land related services is where the land is located, regardless of where the supplier or recipient belong.
The rule applies only to services which relate directly to a specific site of land. This means a service where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property. It does not apply if a supply of services has only an indirect connection with land, or if the land related service is only an incidental component of a more comprehensive supply of services.
What is land?
For the purpose of determining the POS, land (also called immoveable property in legislation) means:
- a specific part of the earth, on, above or below its surface
- a building or structure fixed to, or in, the ground above or below sea level which cannot be easily dismantled or moved
- an item making up part of a building without which it is incomplete (such as doors, windows, roofs, staircases and lifts)
- items of equipment or machinery permanently installed in a building which cannot be moved without destroying or altering the building
What services directly relate to land?
HMRC provide the following examples:
- construction or demolition of a building or permanent structure
- surveying and assessing property
- valuing property
- providing accommodation in hotels, holiday camps, camping sites or timeshare accommodation
- maintenance, renovation and repair of a building
- property management services carried out on behalf of the owner
- arranging the sale or lease of land or property
- drawing up of plans for a building or part of a building designated for a particular site
- services relating to the obtaining of planning consent for a specific site
- on-site security services
- agricultural work on land
- installation and assembly of machines which, when installed, will form a fixture of the property that cannot be easily dismantled or moved
- the granting of rights to use all or part of a property (such as fishing or hunting rights and access to airport lounges)
- legal services such as conveyancing and drawing up of contracts of sale or leases, including title searches and other due diligence on a specific property
- bridge or tunnel toll fees
- the supply of space for the use of advertising billboards
- the supply of plant and equipment together with an operator
- the supply of specific stand space at an exhibition or fair without any related services
What services are only indirectly related to land?
- The following HMRC examples are not deemed to be land related services:
- management of a property investment portfolio
- drawing up of plans for a building that do not relate to a particular site
- arranging the supply of hotel accommodation or similar services
- installation, assembly, repair or maintenance of machines or equipment which are not, and do not become, part of the building
- accountancy or tax advice, even when that relates to tax on rental income
- the supply of storage of goods in property without a right to a specific area for the exclusive use of the customer
- advertising services including those that involve the use of a billboard
- marketing, photography and public relations
- the supply of equipment with an operator, where it can be shown that the supplier has no responsibility for the performance of the work
- general legal advice on contractual terms
- legal services connected with fund raising for property acquisitions or in connection with the sale of shares in a company or units in a unit trust which owns land
- stand space at an exhibition or conference when supplied as part of a package with related services, eg; design, security, power, telecommunications, etc.
These examples are mainly derived from case law and the department’s understanding of the legislation, and they are not exhaustive.
The Reverse Charge
If an overseas supplier provides land related services in GB, the POS is GB, and the reverse charge applies if the recipient is GB VAT registered.
If a GB supplier provides services directly related to land where the land is located outside GB, the POS is not GB. This means that there is a supply in another country. VAT rules in different countries vary (even across the EU) – some countries use the reverse charge mechanism, but others require the GB supplier to VAT register in the country of the POS (where the land is physically located).
How to use HMRC advice and information
HMRC have updated information (on 30 June 2023) on how to use its guidance. This includes when a taxpayer can rely on information and/or advice provided by HMRC. This is the first update since the original publication in March 2009.
The document covers; how to check the advice and information given give applies to a business, what a taxpayer can expect from HMRC, and what to do if you think you have incorrect information.
This covers enquiries made via:
- telephone calls
- pages on gov.uk
- posts on social media
HMRC publishes information and guidance that can address common issues, but this does not always provide a definitive answer in every situation. If this is the case, a business can:
- get independent advice and information
- appoint someone to deal with HMRC on your behalf
Reliance on incorrect information
“You may be able to rely on incorrect advice and information from HMRC, if it’s both:
- reasonable for you to expect this
- very unfair for HMRC to act in a different way from the advice and information given.”
HMRC will take a number of things into account when considering this. In some cases, there may be a strong reason for HMRC to act in a different way from the advice and information given.
Where relevant, HMRC will generally consider whether:
- you told HMRC about all the relevant facts
- HMRC’s advice and information was clear and certain
- you already relied on the advice and information and would be worse off if HMRC did not act in line with it
Once it is clear HMRC’s advice and/or information was incorrect, a taxpayer must make sure to use the correct advice and information going forward.
Right of appeal
There is no general right of appeal against the advice and information HMRC provides, except where rights of appeal are set out in statute.
NB: It is always worth considering the HMRC Charter which sets out what a taxpayer can expect from HMRC and what HMRC expects from a taxpayer.
Overages – what are they and what is the VAT treatment?
Land and property transactions are often complex and high value for VAT purposes. One area which we have been increasingly involved with is overages.
What is an overage?
An overage is an agreement whereby a purchaser of land agrees to pay the vendor an additional sum of money, in addition to the purchase price, following the occurrence of a future specified event that enhances the value of the land. This entitles the seller to a proportion of the enhanced value following the initial sale. Overages may also be called clawbacks, or uplifts.
Overages are popular with landowners who sell with the benefit of development potential and with buyers who may be able to purchase land at an initial low price with a condition that further payment will be made contingent on land increasing in value in the future – this may be as a result, of, say, obtaining Planning Permission.
This is not free from doubt. HMRC’s current view is that the VAT treatment of the overage follows the VAT treatment of the initial supply. This means that it is deemed to be additional consideration for the original supply, so if the land was subject to an Option To Tax (OTT) when originally disposed of the overage payment would be subject to VAT at 20%. Conversely, if the land was sold on an exempt basis, the overage is similarly VAT free and it is important to recognise this and not to charge VAT unnecessarily which would create difficulties for the buyer (because it would not be a VAT-able supply, HMRC would disallow a claim for input tax).
It is crucial to identify this VAT outcome, especially as there could be a long period between the original sale and the overage and there may be a succession of overage payments. Comprehensive records should be made and retained on the VAT status of land sold.
Uncertainty arises because HMRC have changed its view on overages. The original interpretation was that there were two separate supplies, each with distinct VAT treatments. As there was no link to the original supply, the overage was mandatorily standard rated, even if the initial supply was exempt.
Additionally, take the position where the original sale was standard rated due to an OTT on the land, and the buyer subsequently built and sold new dwellings (which effectively disapplies the OTT via para 3, Notice 742A) it could be argued that the overage should be exempt as it is linked to the sale of the new houses.
We understand that HMRC’s analysis is that VAT treatment of overages is determined at the time of the original supply such that it cannot be affected by subsequent events.
In our view, the “new” HMRC view may be open to challenge – We await updated published guidance on this.
B2B and B2C – The distinction and importance
A key feature of the place of supply rules is the distinction between B2B (business to business) and B2C (business to consumer) supplies. The distinction is important because it determines, inter alia, whether GB VAT is applicable to a supply made by a GB supplier.
Status of the customer:
- B2C: A supply is B2C when the customer is a private individual, an organisation with only non-business activities or the supply is wholly for private use (eg for the private use of a business owner)
- B2B: A supply is B2B when the customer has any level of business activity (though if a supply is wholly for private use it remains B2C). It does not matter if the supply is for a non-business activity of the customer or if the customer is not VAT registered. All that matters is the customer has some level of business activity – this includes VAT exempt activity and taxable activity below the VAT registration threshold VAT place of supply.
To apply the B2B treatment a GB supplier must obtain evidence that the customer has business activities. If the supplier cannot obtain any evidence, they should apply B2C treatment.
- If the customer is VAT registered, the customer’s VAT number is evidence of status and it is good practice to quote this on the supplier’s invoice. A GB supplier should check the customer’s VAT registration number is in the correct format for the country concerned. This can be done via the EC Vies website. for EU customers. NB: Special evidence rules apply to electronically supplied services.
- If the customer is not VAT registered, a GB supplier should obtain and retain evidence that the customer has business activities. HMRC state “If your customer is unable to provide a VAT number, you can accept alternative evidence. This includes certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities”.
A supplier needs to identify where his customer belongs in order to establish the place of supply.
VERY broadly, depending on the nature of the supply, the rule of thumb is that a B2B service is GB VAT free (it is subject to a reverse charge by the recipient as it is deemed to be “supplied where received”) but a B2C service is generally subject to GB VAT, regardless of the place of belonging of the recipient. There are exceptions to these rules however, such as the use and enjoyment provisions, land related services, hire of transport and admission to events.
As always we are here to answer any VAT or Tax enquiries. Please don’t hesitate to contact us.
+44 7710 55831